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2015 HUMAN SETTLEMENTS ENVIRONMENTAL SCANNING AND ANALYSIS DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT Volume 1
2015
HUMAN SETTLEMENTS ENVIRONMENTAL SCANNING AND
ANALYSIS
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON
HOUSING DEVELOPMENT
Volume 1
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 1
ENVIRONMENTAL SCANNING: DEVELOPMENTS IN THE GLOBAL AND LOCAL ECONOMY AND THEIR IMPACT ON HOUSING DEVEKLOPMENT
Volume 1
March 2015
Department of Human Settlements
Compiled by: Governance Frameworks, Research Directorate
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 2
Postal Address:
Private Bag X644, Pretoria, 0001
Physical Address:
240 Justice Mohamed Street, Govan Mbeki House, Sunnyside, 0002
Call Centre: 0800 14 6873
Telephone: 012 421 1762
Fax: 012 444 5001
Email: [email protected]
Website: www.dhs.gov.za
Fraud and Corruption: 0800 701 701
Copyright©2014 Department of Human Settlements
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 3
Table of Contents
1. INTRODUCTION.....................................................................................................4
2. GLOBAL ECONOMIC DEVELOPMENTS ...........................................................4
3. SOUTH AFRICAN ECONOMIC OUTLOOK ........................................................5
3.1 Economic Performance ........................................................................................... 5
3.2 Developments in energy prices ............................................................................... 6
3.3 Inflation movements and its impact ........................................................................ 7
3.4 Interest Rates ........................................................................................................... 9
3.5 Unemployment ........................................................................................................ 9
3.6 Access to credit ..................................................................................................... 10
3.7 Credit Defaults ...................................................................................................... 11
4. CURRENT DEVELOPMENTS IN THE BUILDING INDUSTRY ......................11
4.1 Building plans completed ...................................................................................... 12
4.2 Building Plans Passed ........................................................................................... 12
4.3 Building Costs ....................................................................................................... 14
4.4 Cement Prices........................................................................................................ 14
5. OVERVIEW OF THE RESIDENTIAL PROPERTY MARKET ..........................16
5.1 Residential Property Prices .................................................................................. 16
5.2 Land Values.......................................................................................................... 16
6. CHALLENGES.......................................................................................................17
6.1 Poor prospects of economic performance ............................................................. 17
6.2 High rate of unemployment .................................................................................. 17
6.3 Vulnerability of the low income earners ............................................................... 17
6.4 Increasing input cost ............................................................................................. 18
6.5 Subdued property market ...................................................................................... 18
7. FUTURE ECONOMIC PROSPECTS AND IMPACT ON THE RESIDENTIAL
PROPERTY MARKET ..........................................................................................18
8. REFERENCES ........................................................................................................21
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 4
1. INTRODUCTION
The human settlements environmental scanning report is a quarterly publication focusing
on developments in the global and local economy, building sector as well as residential
property market and their potential impact on housing development. This report is
compiled by Governance Frameworks, Research Directorate of the Department of Human
Settlements using various sources that comprise Statistics South Africa, Bureau for
Economic Research, building material retailers, document analysis, surveys and interviews
with key players in the construction industry. The publication is intended for practitioners
and stakeholders in the human settlements sector. It provides an analysis of trends relating
to developments in the global and local economy, the state of the building industry, the
residential property market and how these affect the mandate of the Department of Human
Settlements.
The impact of global economic developments in South Africa is analysed using variables
such as GDP growth, inflation, interest rates, access to credit, credit defaults and rate of
unemployment. Analysis of developments in the building industry includes comparative
analysis of the cost of building materials, building plans passed, etc. An analysis of
developments in the residential property market is also discussed focusing mainly on the
affordable market.
Furthermore business and consumer confidence indices are utilised to determine future
developments in the economy and construction industry. Implications are drawn on how
these could weaken or strengthen the implementation of policies and programmes of the
Department of Human Settlements.
2. GLOBAL ECONOMIC DEVELOPMENTS
According to the International Monetary Fund’s (IMF), world growth accelerated to 3.8% in
the third quarter of 2014 from 3.3% in the second quarter, with growth that remained
largely divergent among the major economies. Oil prices in US dollar terms have dropped
sharply since September 2014, putting huge downward pressure on inflation over a wide
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 5
front, with oil exporting countries facing significantly lower levels of revenue as a result of
the lower oil prices. Economic growth in the US has picked up during the course of 2014
after a contraction in the first quarter on the back of severe weather conditions, with labour
market conditions improving as the year progressed and inflation remaining low as a result
of dollar strength and declining oil prices.
In the euro area, economic growth was still very much subdued up to late last year, while
inflation continued to decline to a point where the region is on the brink of falling into a
state of widespread deflation. The European Central Bank has announced a package of
substantial quantitative easing in January 2015, related to the purchase of financial assets in
an attempt to revive economic activity and inflation in the European economy.
The Japanese economy technically experienced a recession in the third quarter of 2014,
with inflation on a downward trend. Lower economic growth was also evident in China,
impacted by subdued investment growth, while the Russian economy weakened markedly
on the back of the significantly lower oil prices and ongoing geopolitical tensions that
caused economic sanctions to be imposed against the country by some prominent Western
countries.
As a result of these trends and developments, monetary policy has remained largely
accommodative in advanced economies in 2014, whereas currency weakness in emerging
and developing economies has caused interest rates to be raised in some of these countries
that are heavily reliant on commodity exports (South African Reserve Bank).
3. SOUTH AFRICAN ECONOMIC OUTLOOK
3.1 Economic Performance
According to Statistics South Africa, the annualised South Africa’s economy grew by 1.5% in
2014, down from 2.2% in 2013. The industry that grew the fastest in 2014 was agriculture,
expanding by 5.6%, with government services coming in second place at 3.0%.
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 6
Economic activity within the mining and electricity industries decreased by 1.6% and 0.9%
respectively, while manufacturing showed very little change for the entire year. The mining
industry was interrupted by widespread strikes during the first half of 2014, resulting in a
decline of -22.8% in mining activity in the first quarter and -3,0% in the second quarter. This
was followed by positive growth during the second half of the year, with mining expanding
by 3.9% in the third quarter and 15.2% in the fourth quarter. The increased mining activity
in the fourth quarter was due to higher production in the mining of other metal ores
(including platinum) and other mining and quarrying (including diamonds).
South Africa’s GDP for 2014 was R3.8 trillion (STATSSA, 2015).
3.2 Developments in energy prices
The energy prices and in particular petrol price in South Africa is linked to the price of crude
oil in international markets and is quoted in US dollars (US$) per barrel. Crude oil prices
combined with the Rand/Dollar exchange rate therefore have a major impact on petrol
prices. In order for a refinery to make a profit, the price for the product manufactured from
crude oil has to be higher than that of the crude oil price. Therefore, if crude oil prices
increase, the petrol price has to increase so that crude oil refineries are able to cover their
costs.
Crude oil fell from a high of $115 a barrel in June to a low of $45 in January 2015. The
lower prices have generated ripple effects throughout the global economy. The
primary reasons for the low prices include demand for oil in the industrialised world
and ever advancing technological change in the extraction and use of oil (Department
of Energy, 2014).
The average international product prices of petrol, diesel and illuminating paraffin
decreased during the review period of 28 November 2014 to 01 January 2015. The average
Rand/US Dollar exchange rate weakened when compared to the previous period. The
average Rand/US Dollar exchange rate during the review period of 28 November 2014 to 01
January 2015 was 11.4749 compared to 11.0969 during the previous period. The weakening
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 7
of the Rand against the US Dollar increased the contribution of the basic fuels price on
petrol, diesel and illuminating paraffin by 17.92 c/l, 19.43 c/l and 19.75 c/l respectively. The
weakening of the Rand/US Dollar exchange rate led to further increased contribution to the
basic fuels price on petrol, diesel and illuminating paraffin by 54 c/l, 0.56 c/l and 0.57 c/l
respectively during the 30 January to 26 February 2015 review period (Department of
Energy, 2014).
3.3 Inflation1 movements and its impact
The Consumer Price Index (CPI) and Producer Price Index (PPI) are the two primary
measures of inflation for South Africa. The CPI tracks the rate of change in the prices of
goods and services purchased by consumers. Thus, the headline CPI is used as the inflation
target measure which guides the South African Reserve Bank (SARB) on the setting of
interest rates. The PPI tracks the rate of change in the prices charged by producers of goods.
According to Statistics South Africa, the headline CPI (for all urban areas) annual inflation
rate in February 2015 was 3.9%. This rate was 0.5 of a percentage point lower than the
corresponding annual rate of 4.4% in January 2015. On average, prices increased by 0.6%
between January 2015 and February 2015.
The food and non-alcoholic beverages index increased by 0.4% between January 2015 and
February 2015. The annual rate decreased to 6.4% in February 2015 from 6.5% in January
2015. The alcoholic beverages and tobacco index increased by 1.0% between January 2015
and February 2015. The annual rate increased to 8.2% in February 2015 from 7.4% in
January 2015.
The transport index decreased by 2, 5% between January 2015 and February 2015, mainly
due to a 93c/litre decrease in the price of petrol. The annual rate decreased to -6.3% in
February 2015 from -2.5% in January 2015. The restaurants and hotels index increased by
0.2% between January 2015 and February 2015. The annual rate decreased to 7.0% in
1 Inflation is the rate at which prices are increasing
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 8
February 2015 from 7.4% in January 2015. The miscellaneous goods and services index
increased by 5.2% between January 2015 and February 2015, mainly due to a 9.0% increase
in health insurance. The annual rate increased to 7.8% in February 2015 from 7.3% in
January 2015 (STATSSA, 2015).
FIGURE 1: INFLATION RATES
Source: STATSSA, Jan 2015
The annual percentage change in the PPI for final manufactured goods was 2.6% in February
2015 (compared with 3.5% in January 2015). From January 2015 to February 2015 the PPI
for final manufactured goods increased by 0.4%. The main contributor to the annual rate of
2.6% was food products, beverages and tobacco products (7.0% year-on-year and
contributing 2.3 percentage points).
Though PPI is also on a declining trend, the cost of production is still expensive. For housing
specifically, if costs of production are still high, it means that the value capital investments
made for housing development will consistently decline. The result is that it will cost a little
6.4
0%
6.0
0%
5.5
0%
5.3
0%
5.4
0%
5.8
0%
5.9
0%
6.0
0%
6.1
0%
6.6
0%
6.6
0%
6.3
0%
6.4
0%
5.9
0%
5.9
0%
5.8
0%
6.1
0%
4.4
0%
3.9
0%
6.7
0%
6.7
0%
6.3
0%
5.8
0%
6.5
0%
7.0
0%
7.7
0%
8.2
0%
8.8
0%
8.7
0%
8.1
0%
8.0
0%
7.2
0%
6.9
0%
6.7
0%
6.5
0%
5.8
0%
3.5
0%
2.6
0%
0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% 8.00% 9.00%
10.00%
CPI PPI
INFLATION RATES 2013-2015
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 9
more to build the same size of a house. These developments together with high prices of
essentials like food and clothing for instance does indicate that households will find it more
challenging to provide shelter for themselves and therefore will require some form of
assistance from government.
3.4 Interest Rates
At its Monetary Policy Committee (MPC) meeting in March, the South African Reserve Bank
left the repo rate unchanged at 5.75%. The prime interest rate asked by commercial banks
also remained unchanged at 9.25% (SA Reserve Bank, 2015). This decision meant that the
pressure on disposable income for individuals with mortgages and other forms of credit
exposure also remained unchanged.
In its previous statement the Committee noted that the more favourable inflation path
allowed for some room to pause in the process of domestic monetary policy normalisation.
The deterioration in the outlook suggests that this scope has narrowed. The uncertainties
related to US policy normalisation and the weak state of the domestic economy prompted
the MPC to keep the repurchase rate unchanged for now (SA Reserve Bank, 2014).
3.5 Unemployment
According to the labour force survey of Statistics South Africa, the number of employed
people increased by 203 000 between third and fourth quarters of 2014. Employment
increases were observed in all sectors, with 68 000 in the formal sector and 41 000 in the
informal sector. The agricultural and private households industries also observed increases
in employment of 56 000 and 38 000 respectively.
During this period the labour force decreased by 39 000, while the number of unemployed
people decreased by 242 000. This resulted in unemployment rate decreasing by 1.1
percentage points to 24.3%, absorption rate increasing by 0.4 of a percentage point and the
labour force participation rate decreasing by 0.3 of a percentage point. The number of
discouraged work-seekers decreased by 111 000 and the other (not economically active)
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 10
group increased by 305 000, resulting in a net increase of 194 000 among the not
economically active population (Statssa, 2014).
The high levels of unemployment means people will still be dependent on State assistance
programmes. For the Department of Human Settlements it means more people will require
housing assistance and this will add to the already existing backlog
3.6 Access to credit
According to du Toit (ABSA, 2015) growth in the total value of outstanding credit balances in
the South African household sector slowed down to 3.4% year-on-year (y/y) at the end of
December 2014. This is the lowest level since early 2010. Growth in household unsecured
credit balances dropped further to a level last seen around mid-2010, while growth in
secured credit balances was largely stable at a low level in the last four months of 2014.
Household secured credit balances saw growth of 2.9% y/y at the end of December,
unchanged from November. Secured credit includes instalment sales, leasing finance and
mortgage loans.
Growth in household unsecured credit balances amounting to R335,7 billion tapered off
further to 4.7% y/y at the end of December 2014. The largest component of unsecured
credit balances with a share of 60.4%, are general loans and advances (largely personal
loans and micro finance), registered growth of 2.1% y/y at end of December.
The value of total outstanding private sector mortgage balances, including both commercial
and residential mortgage loans, saw growth of 4.3% y/y at end of December, showing a
gradual upward trend since a recent low in growth of 3.3% y/y at the end of September
2014. This was the result of mainly accelerating year-on-year growth in corporate mortgage
balances during this period, while growth in household mortgage balances remained muted.
Growth in outstanding household mortgage balances was only marginally up to 2.3% y/y at
end of December last year from 2.2% y/y and 2.0% y/y at end of November and end of
October respectively. The value of outstanding mortgage balances is the net result of all
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 11
property transactions related to mortgage loans, including additional capital amounts paid
into mortgage accounts and extra monthly payments above normal mortgage repayments.
Economic developments, and the consequential impact on household finances and
consumer confidence, will remain important driving factors of household credit and its
various components. Although economic growth is forecast to pick up in 2015 from last
year, with inflation expected to be lower on the back of sharply lower international oil and
domestic fuel prices, and interest rates projected to rise only later in the year, growth in
household credit balances, including mortgage balances, is forecast to remain in single digits
this year.
3.7 Credit Defaults
According to du Toit (2015), in the third quarter of 2014 a total of 10.05 million credit active
consumers, or 44.7% of a total of 22.5 million, had impaired credit records, up from 9.95
million (45.0%) in the second quarter. The number of consumers in good standing came to
12.45 million (55.3%) in the third quarter compared with 12.17 million (55%) in the second
quarter. A total number of 81.18 million consumer credit accounts were active in the third
quarter of last year, of which 59.55 million (73.3%) were in good standing and 21.64 million
(26,7%) were impaired.
Consumer financial vulnerability, as measured by the Bureau of Market Research (BMR),
improved somewhat in the third quarter of 2014 from the second quarter. But still,
consumers’ credit-risk profiles severely restrict the access to credit and adversely affects
household consumption expenditure against the background of the continued low level of
household savings.
4. CURRENT DEVELOPMENTS IN THE BUILDING INDUSTRY
According to ABSA, building activity in the South African market for new housing, as
reflected by the number of building plans approved and the number of buildings completed,
started 2015 on a relatively low note, with both the planning and the construction phases
recording a decline in volumes in January from a year ago. In the third quarter of 2014,
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 12
there were more than 6 million residential properties in South Africa with a total value of
almost R4.3 trillion, of which 2.1 million with a total value of R2.3 trillion were bonded and
3.9 million with a total value of R2 trillion were non-bonded.
ABSA further highlights that the General Household Survey 2013, published by Statistics
South Africa in June this year shows that 77.7% of a total of 15.107 million households were
living in formal housing; 13.6% of households were living in informal housing; 15.3% of
households were living in RDP or state subsidised housing; 13.6% of households had at least
one member on a waiting list for state-subsidised housing and 13. 3% of households were
receiving a housing subsidy from the state.
4.1 Building plans completed
The number of building completed reflects the level of building activities that occurred
during the specified period. According to Statistics South Africa (2014d), the value of
buildings reported as completed at current prices decreased by 13.3% (-R478.1 million) in
January 2015 compared with January 2014. Decreases were reported for additions and
alterations (-34.6% or -R267.3 million), non-residential buildings (-17.1% or -R162.3 million)
and residential buildings (-2.6% or -R48.4 million).
4.2 Building Plans Passed
According to Statistics South Africa, the building plans passed provide an indication of the
level of building activities that is expected to take place in the near future. According to the
Statistics South Africa, the value of recorded building plans passed at current prices
decreased by 6.2% (-R381,4 million) in January 2015 compared with January 2014. Non-
residential buildings fell by R750.4 million (55.8%), mainly as a result of decreases in
industrial and warehouse space (-R364,6 million) and office and banking space (-R347,1
million).
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 13
Table 2: Comparative Analysis of Building Plans Passed and Completed by Province
Province % Change in Buildings Completed
Between January to September 2013
and January to September 2014
% Change in Building Plans Passed
Between January to September 2013
and January to September 2014
Eastern Cape -1.3 0.1
Free State -0.8 -2.1
Gauteng 3.2 -0.7
KwaZulu-Natal -3.2 -1.1
Limpopo -0.7 0.8
Mpumalanga -0.1 0.1
Northern Cape -0.4 -2.8
North West 0.8 -0.6
Western Cape -10.7 6.3
Total -13.3 -6.2
Source: Stats SA, 2015
Out of the nine provinces, seven reported a year on year (y/y) negative value of buildings
completed in January 2015. The Western Cape dominated the decrease with a -10.7
followed by KwaZulu Natal and Eastern Cape with -3.2 and -1.3 respectively. Gauteng
recorded a figure of 3.2 followed by North West with 0.8. In terms of building plans passed,
four provinces reported y/y increases in the value of building plans passed. Western Cape
lead the positive figure with a 6.3 followed by Limpopo with 0.8. The rest of provinces are
having a decreased number of building plans passed in January 2015.
Residential building activity continues to be influenced by conditions and trends in the
economy, household finances, consumer and building confidence, as well as factors related
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 14
to the demand for and supply of new housing. These will remain the main driving factors of
residential building activity.
4.3 Building Costs
According to ABSA (2015), the cost of having a new house built increased by 6.8% y/y in the
fourth quarter of 2014, down from an increase of 7.8% y/y in the third quarter and 8.6% y/y
in the second quarter, but remained above the average consumer price inflation rate of
6.1% y/y in these quarters. Despite the continued upward trend in building costs, the
growth in the average price of a new house has been slowing down up to the end of 2014.
Building costs showed an increase of 7.5% in 2014 after rising by 7.1% in 2013.
Factors impacting building costs and ultimately the price of new housing include building
material; transport; equipment and labor costs. The cost of developing land for residential
purposes also contributes extensively to the escalation of building costs.
Global economic growth rates seem to be recovering gradually. BER business survey data
reflect an improved business confidence levels. BER building survey respondents have
become optimistic about business conditions for the first time in six and a half years.
These building costs developments suggest that input costs continues to increase going
forward and therefore they should be adequately accommodated in the subsidy quantum.
4.4 Cement Prices
Cement is one of the major products utilised in the building industry particularly in
government-subsidised housing. Therefore, increases in the cement price impact
significantly in the delivery of government subsidised housing and the total building costs. A
telephonic interview with Cash Build Hardware was conducted to establish the cement
prices in all Provinces. According to the data obtained from them, it was evident that the
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 15
cement prices vary. These varying prices might be due the transport costs associated with
delivering products different provinces within the country.
FIGURE 2
Source: Department of Human Settlements, 2015
In trying to track trends in cement prices, most provinces experienced there haven’t been
major changes in the cement prices between July 2014 and March 2015. It should be noted
that in provinces such as Mpumalanga, Free State, KwaZulu Natal and Eastern Cape, the
Cashbuild hardware don’t stock the PPC cement. They only sell the NPC, LaFarge, Afrisam
and Sephaku. This might be the reason for the difference in prices. In terms of the most
expensive prices, Mpumalanga reported an alarming R103.45 followed by R94.20 for
Western Cape. (Human Settlements, 2014).
These figures are indicating that the transport costs from the harbour to the inland could be
a major factor that affects prices for goods in the inland provinces.
R 0.00
R 20.00
R 40.00
R 60.00
R 80.00
R 100.00
R 120.00
R 8
5.0
0
R 8
5.9
5
R 8
7.9
5
R 8
1.9
5
R 7
7.2
5
R 7
6.9
5
R 7
8.9
5
R 8
4.9
5
R 8
8.7
0
R 8
5.0
0
R 8
5.9
5
R 7
8.9
5
R 8
1.0
0
R 7
7.2
5
R 7
6.4
5
R 7
8.9
5
R 8
2.3
0
R 8
8.7
0
R 8
3.0
0
R 8
5.8
0 R
10
3.4
5
R 8
6.0
0
R 7
8.8
0
R 7
9.8
5
R 8
1.0
0
R 8
4.8
5
R 9
4.2
0
Jun-14 Sep-14 Mar-15
CEMENT PRICES
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 16
5. OVERVIEW OF THE RESIDENTIAL PROPERTY MARKET
Trends in house prices is a reflection of the property market conditions and related factors
which are affected by a combination of macroeconomic developments, the state on
household finances and the level of consumer confidence.
According to ABSA, House price growth in the middle segment of the market remained
largely resilient throughout 2014, despite some challenging economic conditions impacting
households over a wide front during the course of the year. In both the categories of
affordable and luxury housing nominal price growth was higher last year compared with
2013, with prices also increasing in real terms in these two segments of the market. A
situation of a normalisation of and more balanced housing demand and supply conditions
have largely contributed to house price growth in 2014 (ABSA, 2015).
5.1 Residential Property Prices
The affordable segment (houses with the size of 40m2 to 79m2 and priced up to R545, 000 in
2014), increased by 7.4%, with an average price of about R381 000 in the fourth quarter of
2014, after rising by 8.2% in the third quarter. Real price inflation of 1.6% y/y was recorded
in the fourth quarter from the 1.9% recorded in the third quarter (du Toit, 2015).
The average nominal price of a homes in the middle segment of the market (homes of 80m²
to 400m² and priced at R4million or less in 2014) increased by 9.4% y/y to more than R1 315
000 in the fourth quarter of 2014 (9.8% y/y in the third quarter). Real price inflation in this
category of housing came to 3.6% y/y in the fourth quarter of the year, down from 3.4% y/y
in the third quarter (du Toit, 2015).
In the fourth quarter of 2014 the average price of luxury housing (homes priced at between
R4 million and R14.6 million in 2014) rose strongly by a nominal 15.7% y/y to a level of
about R5 935 000, after prices had risen by an equally strong 11.9% y/y in the third quarter.
In real terms, the average price in this category of housing was up by 5.3% y/y and 9.7% y/y
in the third and fourth quarters respectively.
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 17
5.2 Land Values
The value of land for new housing in the middle and luxury segments of the market for
which Absa received applications and approved mortgage finance, increased by a nominal
8.9% y/y to an average of about R588 500 in the fourth quarter of 2014, after having risen
by 7.9% y/y in the third quarter. In real terms residential land values were up by 3.1% y/y in
the fourth quarter of last year, after rising by 1.6% y/y in the preceding quarter.
Residential land values increased by a nominal 6.1% and a real 0.1% in 2014 after nominal
and real growth of 7.6% and 1.8% respectively in 2013. The average price of land for new
middle-segment and luxury housing came to 26.7% of the total value of a new residential
property in these categories in the fourth quarter of 2014, with this ratio averaging 27.1%
last year (du Toit, 2015).
6. CHALLENGES
6.1 Poor prospects of economic performance
World economic growth slowed down in the first half of 2014 compared with the second
half of 2013. It indicates that growth in real world output was down to an annualised rate of
2.7% in the first half of the year from 3.9% in the last six months of 2013.
6.2 High rate of unemployment
The third quarter saw an increase in employment of 22 000 from 8 666 000 in June 2014 to
8 688 000 in September 2014. This resulted to a slight decrease in the unemployment rate
from 25.5% in the second quarter of 2014 to 25.4% in the third quarter. Though a slight
improvement was seen, more South Africans will still rely on government for assistance
including housing.
6.3 Vulnerability of the low income earners
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 18
High level of indebtedness and high level of impaired credit record presents evidence of
vulnerability of low income earners to access mortgage loans which is the main form of
funding housing development for ownership currently. This suggests that incremental
housing should be the preferred approach for housing development for low income earners.
Information from Credit Regulator provides evidence that low income earners are
continually opting for short term loans to fund their housing development as opposed to
mortgage loans.
6.4 Increasing input cost
Cost escalations for new house construction continue to outstrip the cost of buying an
existing house. Increasing land cost is also expected to continue to contribute significantly to
the costs of housing development. This means that more funding will be required to ensure
that the level of housing development is not affected.
6.5 Subdued property market
The property market is expected to continue to reflect conditions of poor economic
performance, struggling consumer sector due to declining values of disposable income
(owing to inflation and increasing costs of living) and limited access to funding due to
indebtedness, impaired credit record and risk aversion by financial institutions. This is more
prevalent in the affordable segment of the market which registered real price deflation of
2.6% y/y in the first quarter.
7. FUTURE ECONOMIC PROSPECTS AND IMPACT ON THE RESIDENTIAL PROPERTY MARKET
Confidence indices are the key leading indicators which points the direction for the future
economic performance. Business confidence and building confidence indices provides
indication of future investments by businesses while consumer confidence is critical to point
the direction of spending by the general public.
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 19
The Business Confidence Index2 (BCI) which measures the confidence levels of prevailing
business conditions in the manufacturing, building, retail trade, wholesale trade and new
vehicle trade sectors increased by 5 points to 51 points in the fourth quarter of 2014.
This is the first time since early 2013 that confidence is back in net positive territory. A
reading of 51 indicates that slightly over half of the respondents are satisfied with prevailing
business conditions.
After reaching lows of 25 and 28 in the second and third quarter respectively,
manufacturing confidence bounced back to 42 index points as the adverse impact of the
labour strikes dissipated. Retailers deteriorated slightly with the index falling by five points,
to a still high 55. Except for clothing, sales volumes generally accelerated in the fourth
quarter. Wholesalers essentially unchanged, with the index stabilising at about 60. As for
new motor dealers, confidence remained depressed at around 30 index points in the fourth
quarter.
According to RBM/BER, the Consumer Confidence Index3 (CCI) consumer confidence index
rebounded from the very low levels of between -6 and -8 index points recorded during the
third and first quarters of 2014 to a high of +4 in the second quarter of 2014. It then slipped
back to -1 index point in the third quarter of 2014 as economic realities once again exerted
downward pressure. The CCI edged up to a level of zero in fourth quarter of 2014. Although
the latest index number is still below the long-term average reading of the CCI (+5 since
1994), consumer confidence is now considerably higher compared to the very low CCI
reading of -7 index points recorded during the 2013 festive season.
2 Business Confidence Index (BCI) is determined from a survey of five major sectors of the economy namely
manufacturing, building, retail trade, wholesale trade and new vehicle trade. BCI measures whether investors in these sectors rate prevailing business conditions as satisfactory or not. 3 Consumer Confidence Index is a FNB/BER survey of consumers based on three questions, namely the
expected performance of the economy, the expected financial situation of households and the rating of the appropriateness of the present time to buy durable goods (such as furniture, appliances, electronic equipment, and motor vehicles) (BER, 2011c).
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 20
The Building Confidence Index4 increased up jumped to 60 points (15 points increase) in the
fourth quarter of 2014. The current level of the index indicates that more than half of the
respondents are satisfied with prevailing business conditions. The pace of growth in
residential building activity quickened unexpectedly during the quarter, boosting work
across the rest of the building value chain. Main contractor confidence jumped to 66 index
points in the fourth quarter, from 53 last quarter. Sub-contractor confidence rose by 3 index
points to 50. The confidence of retailers of hardware was unchanged at a high 74 index
points
4 Building confidence Index measures the level of performance as well as possibility for future investments in
all sectors of the building industry. The index measures the business confidence of all the major role players and suppliers involved in the building industry, such as architects, quantity surveyors, contractors, sub-contractors, wholesale and retail merchants, and manufacturers of building materials (BER, 2011f). The index can vary between zero (indicating an extreme lack of confidence) and 100 (indicating extreme confidence).
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 21
8. REFERENCES
1. Bureau for Economic Research, 2014. Business Confidence Index: fourth quarter
2014, Stellenbosch: Bureau for Economic Research, www.ber.sun.ac.za
2. Bureau for Economic Research, 2014. Consumer Confidence Index: fourth quarter
2014, Stellenbosch: Bureau for Economic Research, www.ber.sun.ac.za
3. Bureau for Economic Research, 2014. Building Confidence Index:fourth quarter 2014,
Stellenbosch: Bureau for Economic Research, www.ber.sun.ac.za
4. Department of Energy, 2015. Fuel Price Media Statement, March November 2014
5. Department of Human Settlements, 2015. Cement Prices. Telephone interviews
conducted in March 2015
6. du Toit, J, 2015 (a). ABSA Residential Building Statistics February 2015,
Johannesburg: ABSA Home Loans, www.absa.co.za
7. du Toit, J, 2015 (b). ABSA Housing Review first quarter 2015, Johannesburg: ABSA
Home Loans, www.absa.co.za
8. The International Monetary Fund January 2015 edition of the World Economic
Outlook
9. Medium-Term Forecasting Associates. Report on Building Costs, fourth Quarter
2014
10. National Credit Regulator, 2014. Credit Bureau Monitor Report; June 2014,
Johannesburg: National Credit Regulator, www.ncr.org
11. SA Reserve Bank, (2015) Statement of the monetary policy committee, March
www.resbank.co.za
12. Statistics South Africa, 2015a. Gross Domestic Product, Pretoria: Statistics South,
February 2015
13. Statistics South Africa, 2015b Consumer Price Index, March 2015
14. Statistics South Africa, 2015c Producer Price Index, March 2015
15. Statistics South Africa, 2015d. Unemployment: Labour Force Survey fourth quarter
2014, Pretoria, www.statssa.co.za
16. Statistics South Africa, 2015e. Selected building statistics of the private sector as
reported by local government institutions, March 2015
DEVELOPMENTS IN THE ECONOMY AND THEIR IMPACT ON HOUSING DEVELOPMENT 22
17. The Conference Board, December 2014. Global Economic Outlook 2014: Slow Global
Growth to See a Rebound in 2014, www.conference-board.org
